Grady Excavating, Inc. filed an appeal challenging the Washington State Office of Minority and Women’s Business Enterprises (OMWBE) Certification Committee’s (Committee) decision to decertify the firm based on an allegation that the owner was no longer economically disadvantaged. The rationale for this determination focused on the company’s success. Essentially, the agency argued that because the business had been so successful in such a short a period of time, the owner could not be economically disadvantaged because “doors open easily for her”.

Holding:

On appeal, the DOT reversed the Committee’s decision but remanded the case back on other grounds. On the issue of economic disadvantage, the DOT made clear that agency erred when it considered the success of the business when examining the owner’s claim of economic disadvantage. “Imputing the value of the applicant firm to an owner’s personal net worth is not consistent with the intent of our rule”.

Analysis:

This case is important because it shows it makes clear that the new regulation creating the accumulation of wealth standard doesn’t give agencies the ability to discard other provisions of the regulations such as the exclusion of the owner’s interest in the business in calculating net worth. Although not discussed in this case, it could also be argued that an agency shouldn’t consider a spouses income, joint assets or the value of the primary residence since those too are specifically excluded from the calculation of personal net worth.

Recently, Rep. Michael Fitzpatrick (R-PA) introduced a bill that would define veteran owned businesses as “Disadvantaged Business Enterprises” or “DBEs”. This is a bad idea for several reasons including if it passes it could mean the end of the Department of Transportation’s DBE program. This is because the Supreme Court has held that programs like the DBE program are constitutional so long as they are “narrowly tailored” or, in other words, not overly inclusive.

Opponents of the bill argue that the amendment is not needed because individuals who are not women or ethnic minorities can obtain DBE certification on a case by case basis using the guidelines in Appendix E to Part 26 — Individual Determinations of Social and Economic Disadvantage. However, it is almost impossible for an individual to obtain DBE certification using the Appendix E process and for Disabled Veterans I would argue that it is even less likely that they could meet the requirements. There are several reasons for this;

First, it must be noted that the Appendix E recognizes that people with disabilities have disproportionately low incomes and high rates of unemployment and recognizes that many individuals with disabilities my be socially and economically disadvantaged. However, the evidence an individual has to produce in order to prove social an economic disadvantage is difficult at best to acquire.

For example, to show that they are socially disadvantaged, an individual has to describe “personal experiences of substantial and chronic social disadvantage in American society, not in other countries”. The agency receiving the application will consider the applicant’s education, employment and business history to see if the totality of circumstances shows disadvantage in entering into or advancing in the business world. The problem is most agencies read the regulations to mean that the applicant has to show disadvantages in all three areas: education, employment and business history. Of course, most veterans, disabled or not, will have a tough time showing that that they have “substantial and chronic social disadvantage in American society” since they’ve served in the U.S. military and presumably had access to education and employment. Normally, the analysis ends there. But even if the applicant successfully shows that he meets the social disadvantage prong of the test it is all but impossible to show economic disadvantage.

Under the normal process for obtaining DBE certification, to show economic disadvantage an applicant simply has to show that their Personal Net Worth is less than $1.32 million (minus their personal residence and interest in the DBE business). Not so for the individual seeking certification using the Appendix E process. In addition to reviewing the applicant’s personal income, personal net worth, fair market value of all assets etc. the agency will “consider the financial condition of the applicant compared to the financial profiles of small businesses in the same primary classification, or, if not available, in similar lines of business, which are not owned and controlled by socially and economically disadvantaged individuals in evaluating the individual’s access to credit and capital”.

Agencies normally read this to mean that the applicant has to produce the profiles of other business for the agency to compare. This of course is next to impossible because it would require an individual to obtain the financial information (tax returns, profit and lost statements, balance sheets, etc.) of their competitors in order to prove economic disadvantage. Anyone in business knows that this is an insurmountable hurdle. (That’s why I have unsuccessfully argued in the past that because it is impossible for the applicant to obtain this information the onus necessarily has to be on the agency, who has access to such information to do the comparison.)

While I agree that Rep. Fitzpatrick’s bill would cause irreparable harm to the DBE program and subject it to constitutional challenge, those opposing the bill would be better served not to make the argument that individuals who are not women or minorities can obtain DBE certification on a case by case basis because it is, in fact, almost impossible to do so.

Miami-Dade County’s Board of County Commissioners will soon be voting on changes to the County’s Community Small Business Enterprise (CSBE )and Small Business Enterprise (SBE) programs. Both programs are race and gender neutral and can be utilized when the County is not using federal dollars on a particular project. To be eligible for SBE certification, a firm must average gross revenues for the last three (3) years not exceeding $5 million except manufacturers whose number of employees cannot exceed one hundred (100) and wholesalers whose number of employees cannot exceed fifty (50). The firm must also be located and performing a commercially useful function in Miami-Dade County.

For CSBE certification, the firm must be located and performing a commercially useful function in Miami-Dade County. It cannot exceed 3 year average gross receipts of $10 million for general building, $6 million for heavy construction contractors, and $5 million for specialty trade contractors. The firm’s qualifier must own at least 10% of the certified firm’s issued stock. Finally, the Personal Net Worth (PNW) does not exceed $1,500,000 for each owner.

The amendments to the program deal mostly with the PNW requirement and the requirement that firms must be located in Miami-Dade County. If the BCC approves the changes, the PNW requirement for owners of both SBE and CSBE firms will amended so that PNW cannot exceed $1.5 million per owner. This excludes the value of the business and the value of retirement accounts (if documentation is submitted to the Small Business Development).

The amendments would also require business have a physical location in Miami-Dade County as virtual offices will not be allowed.

Finally, firms applying for either certification must have a Miami-Dade County Local Business Tax for one year prior to certification.

Should these changes pass, we anticipate many firms that are currently CSBE or SBE certified will be come ineligible for the programs. To be clear, the CSBE and SBE programs are local programs and are different from the Department of Transportation’s Disadvantaged Business Enterprise (DBE) program. But many firms that qualify for the DBE program also qualify for one or both of the County’s local programs. We anticipate situations where a firm that had multiple certifications could lose one or more.

That’s because under the DBE program, the person upon whom certification is based cannot have a PNW that exceeds $1.32 million excluding that person’s interest in the business and value of the person’s primary residence.

The County’s changes do not exclude the owner’s interest in their primary residence. It also applies to all owners. Those differences are enough to raise the possibility that some firms that currently hold all three certifications SBE, CSBE and DBE may be ineligible for one or more certification should the County enact the changes. If your firm does business in Miami-Dade County, it’s important to determine whether these changes affect your business now, before the changes are enacted. If you will be negatively impacted by the changes contact your County Commissioner immediately and voice your concerns.

We are often asked by potential clients why is there a need to retain an attorney to prepare their Disadvantaged Business Enterprise (DBE) application. Many potential clients are surprised when we inform them that they don’t need a lawyer or consultant to complete their application. Many companies successfully obtain their DBE certification every year without any problems. However, our response comes with one caveat: if you can afford it, if you don’t have the time, or if you have a unique situation that you think might cause you to be denied, then you really should retain the services of a professional who understands the DBE program.

Companies who should qualify for the DBE certification often fail to get certified for the simplest of reasons. This article provides some of the “red flags” that can alarm the person reviewing your application and can cause your application to be denied.

When reviewing your DBE application, the certifying agency seeks to determine whether an economically, and socially disadvantaged person (ESD) owns 51% of the company and whether the ESD meets the Personal Net Worth requirement. In order to be certified, the ESD must also show true ownership of the firm, independence from any other company and the ability to control the firm. If the ESD owner(s) does not possess the power to direct or cause the direction of the management and policies of the firm, certification can be denied. Similarly, if the disadvantaged business owner’s contribution of capital to acquire her ownership interest in the firm was not real, substantial, and continuing, certification can be denied. Likewise, if the socially and economically disadvantaged person has no experience in the firm’s line of business, certification can be denied.

Before we discuss the red flags, a review of rules regarding ownership, control and independence is in order.

OWNERSHIP
To be an eligible DBE, the rules state in part, that a firm must be at least 51 percent owned by socially and economically disadvantaged individuals. In the case of a corporation, such individuals must own at least 51 percent of the each class of voting stock outstanding and 51 percent of the aggregate of all stock outstanding. In the case of a partnership, 51 percent of each class of partnership interest must be owned by socially and economically disadvantaged individuals. Such ownership must be reflected in the firm’s partnership agreement. In the case of a limited liability company, at least 51 percent of each class of member interest must be owned by socially and economically disadvantaged individuals.
The rules further state that contributions of capital or expertise by the disadvantaged owner to acquire an ownership interest in the participating DBE business be real and substantial and continuing, going beyond pro forma ownership of the firm as reflected in ownership documents.
Under the rules, contributions of capital or expertise by the socially and economically disadvantaged owners to acquire their ownership interests must be real and substantial. Examples of insufficient contributions include a promise to contribute capital, an unsecured note payable to the firm or an owner who is not a disadvantaged individual, or mere participation in a firm’s activities as an employee.
For purposes of determining ownership, certifying agencies are required to presume as not being held by a disadvantaged individual, all interests in a business or other assets obtained by the individual as the result of a gift, or transfer without adequate consideration, from any non-disadvantaged individual or non-DBE firm who is (i) involved in the same firm for which the individual is seeking certification, or an affiliate of that firm; (ii) involved in the same or a similar line of business; or (iii) engaged in an ongoing business relationship with the firm, or an affiliate of the firm, for which the individual is seeking certification.
To overcome this presumption and permit the interests or assets to be counted, the rules state that the disadvantaged individual must demonstrate by clear and convincing evidence, that (i) the gift or transfer to the disadvantaged individual was made for reasons other than obtaining certification as a DBE; and (ii) the disadvantaged individual actually controls the management, policy, and operations of the firm, notwithstanding the continuing participation of a non-disadvantaged individual who provided the gift or transfer.ACTUAL CONTROL
The rules require that the disadvantaged owner possess the power to control day-to-day and major decisions of their firms in critical matters. Non-disadvantaged persons may be involved in a DBE firm as owners, managers, employees, stockholders, officers, and/or directors. However, non-disadvantaged persons must not possess or exercise the power to control the firm, or be disproportionately responsible for the operation of the firm.
The rules state in part, that a disadvantaged owner may delegate various areas of the management, policy making, or daily operations of the firm to other participants in the firm, regardless of whether these participants are disadvantaged individuals. Such delegations of authority must be revocable, and the disadvantaged owner must retain the power to hire and fire any person to whom such authority is delegated. The managerial role of the disadvantaged owner in the firm’s overall affairs must be such that the certifying agency can reasonably conclude that the disadvantaged owner actually exercises control over the firm’s operations, management, and policy.
The rules further require that the disadvantaged owner have the technical competence and experience directly related to the type of business in which the firm is engaged and the firm’s operations. The disadvantaged owner is not required to have experience or expertise in every critical area of the firm’s operations, or to have greater experience or expertise in a given field than managers or key employees. The disadvantaged owners must have the ability to intelligently and critically evaluate information presented by other participants in the firm’s activities and to use this information to make independent decisions concerning the firm’s daily operations, management, and policymaking. Generally, expertise limited to office management, administration, or bookkeeping functions unrelated to the principal business activities of the firm is insufficient to demonstrate control.
Finally, the rules state in part, that a disadvantaged individual may control a firm even though one or more of the individual’s immediate family members (who themselves are not socially and economically disadvantaged individuals) participate in the firm as a manager, employee, owner, or in another capacity. If the certifying agency cannot determine that the disadvantaged owners — as distinct from the family as a whole — control the firm, then the disadvantaged owners have failed to carry their burden of proof concerning control, even though they may participate significantly in the firm’s activities.INDEPENDENCE
The rules provide that only an independent business may be certified as a DBE. An independent business is defined as a company whose viability does not depend on its relationship with another firm or firms. In determining whether a potential DBE is an independent business, certifying agencies scrutinize relationships with non-DBE firms, in such areas as personnel, facilities, equipment, financial and/or bonding support, and other resources. They consider whether present or recent employer/employee relationships between the disadvantaged owner(s) of the potential DBE and non-DBE firms or persons associated with non-DBE firms compromise the independence of the potential DBE firm. They also examine the firm’s relationships with prime contractors to determine whether a pattern of exclusive or primary dealings with a prime contractor compromises the independence of the potential DBE firm.
So, in closing, if any of the following “red flags” exist in your business, call us to assist you with your certification application.

• Transfer of stocks/shares or ownership coinciding with DBE application.
• Transfer of stock/shares/ownership as gifts or with no or little exchange of funds.
• ESD individual has no experience in line of business.
• ESD individual’s previous employer has substantial ownership interest in DBE business.
• ESD individual is still employed by former employer.
• Ownership of company goes from non-DBE to DBE but former owners remain with company.
• Discrepancies between Operating Agreement and Partnership Agreement, Articles of Incorporation, etc.
• ESD individual doesn’t live in the same City as principal place of business

Even if you meet all of the requirements for DBE certification, you may not necessarily want to apply for certification if you won’t benefit from the program.
To decide whether you should apply, you should first determine if you meet the requirements for DBE certification. You can look up the requirements on our website. The requirements can also be found here http://osdbuweb.dot.gov/DBEProgram/definitions.cfm or on your state’s Uniform Certification Program (UCP) Website. (To find you state UCP Google the following terms: “uniform certification program [and your state’s name]”. )

Next, you should determine if anyone is buying what you are selling. If you are in the construction business, particularly road construction, then the DBE certification is definitely a “must have” for your company’s growth and development. Since the DBE certification is a Department of Transportation program, its safe to assume that if you are involved in a business in the transportation industry you can benefit from the DBE program. For some industries its not as obvious.

For example, at first glance, it may not make any sense why a janitorial firm would want or need DBE certification. However, We often see solicitations seeking janitorial firms with DBE certifications. That’s because in order to meet the DBE goals in their contracts, prime contractors often seek janitorial firms as subcontractors. Janitorial firms can find work at transportation hubs such as airports, public transportation centers, and highway rest areas. Janitorial firms can work at construction sites or in debris collection.

Another good example is security guard companies. Again, if though security is not transportation related per se, we often see solicitations for DBE security guard companies. Often the work is related to guarding major transportation hubs such as airports, seaports, train and rail stations etc. Often security firms can find work as subcontractors on construction projects where prime contractors need DBE subcontractors in order to meet DBE contract goals.
There are other industries such as IT services, marketing, signage, etc. etc. that are not directly transportation related but who benefit from DBE certification. The best way to learn if someone is buying the goods or services you sell from DBE companies is to research.

1. Go to your County or State website and find out what contracts are available. Often these databases allow you to search previous solicitations.

2. Go talk to a purchasing officer or someone else from your local agency such as your County or State Department of Transportation or transit department. They often know what contracts are coming up and which prime contractors are looking to hire DBE subcontractors.

3. Attend pre-bid meetings. Often, before a government agency accepts bids on a particular project, they will have a pre-bid meeting. A pre-bid meeting is a great place to learn more about the project and ask questions. More importantly a pre-bid meeting is a great place to meet prime contractors who may have an interest in teaming with you or subcontracting with you to meet their DBE goals.

If you’re reading this its probably because you are thinking about applying for the DBE certification. The DBE certification is a great step for the entrepreneur who is new to working on government contracts. If you are an organized person and you are willing to read all the regulations and cases dealing with the DBE program, then you can probably prepare the application on your own. However, if you fall into any of the following categories – – STOP. Please hire someone to help you with your application because there is a high Probability your application will be denied.
1. If you have a business partner who is not socially and economically disadvantaged.
2. If your business requires a state license and someone else in your company holds that license.
3. If you used funds from a joint bank account to start your business.
4. If you own more than one company.
5. If you have full time job or you are a full-time student.
6. If one of your business partners is another company.
7. If you share office space, equipment or personnel with another company.
8. If you have been previously denied DBE certification.
9. If you are a broker.
10. If you are a trucking business and you do not own your own trucks or equipment.
11. If you acquired a controlling share of your business through a gift or you paid less than market value for the controlling share.
12. If you have any question at all regarding your eligibility for the program.
I have been helping individuals obtain the DBE and ACDBE certifications for several years now. Each of the items above is an actual legal issue that I resolved for one of my clients. Understand that if you apply for certification on your own and are denied, unless the agency denying you really screwed up, chances are you will not win on appeal. Therefore, it is imperative that you get it right the first time.

Disclaimer
The above are suggestions to help you in the event you decide to seek DBE certification. It is not legal advice. If there is any question at all about your chances of achieving certification you should refer to the DBE regulations at 49 CFR part 26 or contact your local small business office. You may also call me at (305) 755-9551 for a free 15 minute consultation.

Over 90% of people who call us about being denied DBE certification have been denied because they are in business with someone who is not socially and economically disadvantaged. A person can be non-socially and economically disadvantaged because they exceed the Personal Net Worth requirement of $1.32 million or the person is not a member of one of the presumptive groups of socially and economically disadvantaged individuals. In many cases the business partner is also a relative, spouse, brother etc. of the person claiming social and economic disadvantage status.
Luckily, the regulations governing the DBE program allow you to be in business with non-socially and economically disadvantaged individuals with one caveat: that person cannot be seen to control the DBE company. That’s where most people who get denied run into trouble.
Below are some tips if you are in business with someone who is not socially and economically disadvantaged:
1. Make sure you are the highest ranked individual in the company and make sure you are the highest paid individual. You should not be denied certification if you are not the highest paid person, but make sure you have a good explanation.
2. Make sure you have the technical expertise to run the business. If your business is construction you have to the experience and expertise to run the business. If you own a trucking business, you need to be able to drive the truck. Handling the office work, book keeping, and payroll alone is not considered controlling your business.
3. If you started the business with your spouse who is not socially and economically disadvantaged and you used funds from a joint bank account DO NOT apply for DBE certification with out first contacting us. You will need an agreement whereby your spouse relinquishes any interest in your portion of the business. Without out this agreement your certification will be denied.
4. Make sure you have someone who understands the DBE program (preferably a lawyer) review your corporate documents. Even if you own a controlling share of your company, your corporate documents may say differently or give your partner too much power in the eyes of the person reviewing your application.
5. Make sure that there are no outstanding loans from your partner or agreements that can give the partner control of your company.
If you are in any of the situations described above, contact us immediately. We can often help you resolve these issues before you apply for certification. It’s much more difficult to help after you’ve been denied.
Disclaimer
The above are suggestions are meant to help you in the event you decide to seek DBE certification. It is not legal advice. If there is any question at all about your chances of achieving certification you should refer to the DBE regulations at 49 CFR part 26 or contact your local small business office. You may also call me at (305) 755-9551 for a free 15 minute consultation.

Over the last few years we have received scores of calls and have been retained by numerous women business owners attempting to certify their firms as Disadvantaged Business Enterprises (DBE) or Airport Concessions Disadvantaged Business Enterprises (ACDBE). Often these firms are either facing difficulties attempting to get certified or have been decertified for a number of reasons.

In our experience, the most common reason for the denial or decertification of women owned businesses is the involvement of non-economically disadvantaged individuals in the business as owners, managers or other high-level positions. Often these non-economically disadvantaged individuals are the husbands of the female owner, or high level, male employees or qualifiers for the business. If a male individual is involved in the business, the reasons cited for denial can be lack of independence, control or ownership. This is often disconcerting for the woman owner because she often controls the day-to-day operations, the managerial and bookkeeping aspects of the business. However, control of those aspects of the business alone is not enough to show ownership, control and independence as defined by the Department of Transportation (DOT).

The regulations governing the DBE program specifically state that non-disadvantaged individuals can be involved in the business. Unfortunately, what the regulations state and how the rules are interpreted and enforced can be very different. The following are 10 tips for the woman business owner on how to obtain and keep your DBE certification.

1. Know your business. Knowing your business means having the technical expertise and knowledge to run your business. If, for example, you own a construction company, you will be expected to have the licenses, educational background and job history to actually run the business. Hiring personnel with the requisite expertise is not enough, especially if those key employees are men. You must be able to show that you can perform the work yourself. One key requirement that often trips up women business owners is allowing others to handle estimating and bidding functions. Handing these key functions overt to a male employee or owner is an almost guaranteed way to have your firm’s certification denied.

2. Own your business. Owning your business means showing the certifying agency that you, in fact, own your business. Borrowing money to start your business from a non-economically disadvantaged individual, subcontracting with only one male-owned company, and being a party to overly restrictive agreements are all reasons for your firm to be denied. The example we see most are firms that were once wholly owned by men, which become women owned by various devices. Firms in this category must be especially prudent in documenting how the woman owner came to own a controlling share of the company.

3. Know the difference between “family owned” and “woman owned”. The DBE regulations provide that if a certifying agency can’t tell if a business is owned and controlled by its female owner or her family, that firm can be classified a “family owned business” and be denied DBE certification. The prime example we see are companies owned jointly by husbands and wives.
Even if the wife in such a company owns 51% of the company, the firm can be denied certification if the wife fails to meet certain criteria such as having technical expertise, knowledge of the business, control of finances and other decision making processes.

4. Control the finances of your businesses. We have seen women owned business decertified or denied certification simply because a male employee or owner has unrestricted access to a firm’s bank accounts. As the owner of the company, the woman business owner must have full control of the company’s finances. If you must share signatory power on bank accounts with male employees or owners limit their signatory power. Banks will allow you to limit signatory power to a certain dollar amount, number of checks or other limitations. Having these limitations in place can assist you in obtaining your DBE certification by showing that you are in control of the firm’s finances.

5. Pay yourself. The DBE regulations require that the disadvantaged owner “must enjoy the customary incidents of ownership, and share in the risks and profits commensurate with their ownership interests, as demonstrated by the substance, not merely the form, of arrangements.” This has been interpreted to mean that the woman business owner must be the highest paid person in the firm. If the female owner is not the highest paid person, the burden is on her to show why this shouldn’t be held against her. If for some reason, you are not the highest paid person at your firm, be prepared to explain why and have the documents to back up your explanation.

6. Ensure that your corporate documents reflect control and ownership by a woman. We have seen woman business owners denied DBE certification because they relied on generic forms to create their company. Imagine, for example, a woman owns 51% of a firm and a non-disadvantaged individual owns 49% of the firm. However, the firm is managed by a board of directors consisting of the two owners who each have an equal vote. In that case, the woman owner will not deemed to be in control of the company because both owners have equal control over the company. Generic corporate documents such as bylaws and articles of organization often contain clauses that will guarantee you will be denied DBE certification. It’s imperative that you have an attorney who understands the requirements of the DBE program prepare and or review your corporate documents.

7. Keep your business independent. Sharing space, equipment or personnel with another firm, especially if the other firm is owned by a non-socially and economically disadvantaged individual, can lead to a denial. We even caution our clients to stay away from home-based business if they are married and their spouse is running his business from the home. Independence also becomes an issue if you only have one source of business, especially if that source of business is owned by a non-socially and economically disadvantaged individual(s). Your company should be self-reliant or you may deal with questions regarding whether your company is truly independent.

8. Avoid owning more than one company. The DBE regulations require that you devote your time to the DBE certified firm. Owning more than one company, even if that company is inactive, can cause your DBE certification to be denied or delayed. Additionally, your interest in any business other than the DBE firm will count towards your Personal Net Worth. Depending on the number of businesses you own and their value, this could cause you to exceed the Personal Net Worth requirement of $1.32M and cause you to be denied DBE certification.

9. Avoid full-time employment. Similarly to number 8 above, having a full-time job in a business other than the firm seeking DBE certification can cause your application to be denied. Similarly, being a full-time student can result in your application to being denied.

10. Don’t engage in fraud. We have seen instances where female employees are asked by their employers to create firms so that the employer can take advantage of the DBE program and other certification programs. Don’t do it! First, it is illegal and can get you into serious trouble. Second, it is relatively easy to spot such companies. Remember, the burden is on the DBE applicant to prove that she meets the requirement of the program. The certifying agency will have access to all sorts of documentation, including your corporate documents, tax returns and other information that can easily show whether your company is legitimate or not.

Hopefully, the tips provided above will assist you as you seek DBE certification for your woman-owned business. If you have any questions or need any assistance, please feel free to call us at (305) 755-9551

When reviewing your Disadvantaged Business Enterprise (DBE) certification application the certifying agency seeks, at a minimum, to determine whether a socially and economically disadvantaged person (S&ED) owns 51% of the company and whether the S&ED meets the personal net worth requirement of the program.

But in order to be certified, the S&ED must also show true ownership of the firm, independence from any other company and the ability to control the firm. If the S&ED owner(s) does not possess the power to direct or cause the direction of the management and policies of the firm, certification can be denied. Similarly, if the disadvantaged business owner’s contribution of capital to acquire her ownership interest in the firm was not real, substantial, and continuing, certification can be denied. Likewise, if the socially and economically disadvantaged person has no experience in the firm’s line of business, certification can be denied. A review of rules regarding ownership, control and independence follows.

OWNERSHIP

To be an eligible DBE, the rules state in part, that a firm must be at least 51 percent owned by socially and economically disadvantaged individuals. In the case of a corporation, such individuals must own at least 51 percent of the each class of voting stock outstanding and 51 percent of the aggregate of all stock outstanding. In the case of a partnership, 51 percent of each class of partnership interest must be owned by socially and economically disadvantaged individuals. Such ownership must be reflected in the firm’s partnership agreement. In the case of a limited liability company, at least 51 percent of each class of member interest must be owned by socially and economically disadvantaged individuals.

The rules further state that contributions of capital or expertise by the disadvantaged owner to acquire an ownership interest in the participating DBE business be real and substantial and continuing, going beyond pro forma ownership of the firm as reflected in ownership documents.

Under the rules, contributions of capital or expertise by the socially and economically disadvantaged owners to acquire their ownership interests must be real and substantial. Examples of insufficient contributions include a promise to contribute capital, an unsecured note payable to the firm or an owner who is not a disadvantaged individual, or mere participation in a firm’s activities as an employee.

For purposes of determining ownership, certifying agencies are required to presume as not being held by a disadvantaged individual, all interests in a business or other assets obtained by the individual as the result of a gift, or transfer without adequate consideration, from any non-disadvantaged individual or non-DBE firm who is (i) involved in the same firm for which the individual is seeking certification, or an affiliate of that firm; (ii) involved in the same or a similar line of business; or (iii) engaged in an ongoing business relationship with the firm, or an affiliate of the firm, for which the individual is seeking certification.

To overcome this presumption and permit the interests or assets to be counted, the rules state that the disadvantaged individual must demonstrate by clear and convincing evidence, that (i) the gift or transfer to the disadvantaged individual was made for reasons other than obtaining certification as a DBE; and (ii) the disadvantaged individual actually controls the management, policy, and operations of the firm, notwithstanding the continuing participation of a non-disadvantaged individual who provided the gift or transfer.

ACTUAL CONTROL

The rules require that the disadvantaged owner possess the power to control day-to-day and major decisions of their firms in critical matters. Non-disadvantaged persons may be involved in a DBE firm as owners, managers, employees, stockholders, officers, and/or directors. However, non-disadvantaged persons must not possess or exercise the power to control the firm, or be disproportionately responsible for the operation of the firm.

The rules state in part, that a disadvantaged owner may delegate various areas of the management, policy making, or daily operations of the firm to other participants in the firm, regardless of whether these participants are disadvantaged individuals. Such delegations of authority must be revocable, and the disadvantaged owner must retain the power to hire and fire any person to whom such authority is delegated. The managerial role of the disadvantaged owner in the firm’s overall affairs must be such that the certifying agency can reasonably conclude that the disadvantaged owner actually exercises control over the firm’s operations, management, and policy.

The rules further require that the disadvantaged owner have the technical competence and experience directly related to the type of business in which the firm is engaged and the firm’s operations. The disadvantaged owner is not required to have experience or expertise in every critical area of the firm’s operations, or to have greater experience or expertise in a given field than managers or key employees. The disadvantaged owners must have the ability to intelligently and critically evaluate information presented by other participants in the firm’s activities and to use this information to make independent decisions concerning the firm’s daily operations, management, and policymaking. Generally, expertise limited to office management, administration, or bookkeeping functions unrelated to the principal business activities of the firm is insufficient to demonstrate control.

Finally, the rules state in part, that a disadvantaged individual may control a firm even though one or more of the individual’s immediate family members (who themselves are not socially and economically disadvantaged individuals) participate in the firm as a manager, employee, owner, or in another capacity. If the certifying agency cannot determine that the disadvantaged owners — as distinct from the family as a whole — control the firm, then the disadvantaged owners have failed to carry their burden of proof concerning control, even though they may participate significantly in the firm’s activities.

INDEPENDENCE

The rules provide that only an independent business may be certified as a DBE. An independent business is defined as a company whose viability does not depend on its relationship with another firm or firms. In determining whether a potential DBE is an independent business, certifying agencies scrutinize relationships with non-DBE firms, in such areas as personnel, facilities, equipment, financial and/or bonding support, and other resources. They consider whether present or recent employer/employee relationships between the disadvantaged owner(s) of the potential DBE and non-DBE firms or persons associated with non-DBE firms compromise the independence of the potential DBE firm. They also examine the firm’s relationships with prime contractors to determine whether a pattern of exclusive or primary dealings with a prime contractor compromises the independence of the potential DBE firm.

TIPS FOR NOT BEING DENIED.

Based on the above, a company desiring to be certified should ensure that it doesn’t make the following mistakes:

Ensure that any transfer of stocks/shares or ownership does not coincide with the submission of your DBE application.

Avoid transferring stock/shares/ownership as gifts or with no or little exchange of funds.

If the S&ED individual has no experience in line of business ensure that the S&ED obtains formal training and or degrees or certifications in the line of business.

One of the things I’m always telling my clients is that there are some things you do that make business sense and there are other things you do to get DBE certified – and they are not necessarily the same!

The DBE program has some very specific, and often, peculiar rules that sometimes make no business sense at all. If you don’t know those rules, it can trip you up and cause you to be denied DBE certification. The following are some real life examples we’ve dealt with:

Scenario 1:

A client once came to me after she had been denied DBE certification because the certifying agency claimed that she did not control her business. The basis of that decision? My client’s father had lent her $50,000.00 just before she applied for certification. When I spoke to her father, he explained that he was in business for many years and he thought there was no way his daughter could be DBE certified without showing that she had the funds to actually carry out the work she was proposing to do. Of course, there is no requirement in the DBE program that you show adequate capitalization. In the end, we counseled the client not to appeal the denial and simply wait a year to reapply. We also counseled her to repay the loan as soon as possible.

Scenario 2:

A client was denied because the certifying agency thought her husband who was not an owner or employee of the business had too much control. The reason? My client had made her husband a signatory on the firm’s bank accounts so that in case of emergency her husband could sign checks on her behalf. Even though the husband was employed in a completely different line of business and had no other involvement in his wife’s business, the certifying agency ultimately decided the husband had too much control.

Scenario 3:

My client ran a company that had multiple offices in multiple states. He travelled back and forth between the various offices. However, the day to day management of each office was handled by area managers. He had obtained DBE certification in multiple states with no problem. When he applied to a state (State B) he was informed that his DBE certification was denied. That state decided that because he did not reside in the state and did not handle the day to day activities of the local office himself, he could not be DBE certified. Luckily for my client, State B didn’t follow the rules for Interstate Certification. We were able to get State B to reverse the denial. Once the denial was reversed my client withdrew his application because he did not want to risk losing his other DBE certifications.

Scenario 4:

Our client’s annual No Change Affidavit was due right after the tax filing due date. However, he normally filed his taxes late. This was not a problem until the certifying agency decided that he had exceeded the Personal Net Worth limit of the DBE program. Although it made business sense for him to file his taxes late, in order to remain in the DBE program he was forced to file his taxes in order to show that he continued to be below the PNW threshold.

In all of these scenarios the client had to balance between what made business sense and what made sense under the DBE program. Ultimately, in order to remain in the program they had to do what made sense under the DBE program. As a DBE certified firm you will be presented with opportunities and scenarios that make perfect business sense but could jeopardize your DBE certification.

We have considerable experience counseling and assisting DBE certified firms. If you need any advice on anything involving your DBE certification gives a call or email me today.